"Official sources quoted by Mediafax said The National Bank would reduce the official rate next week, probably by 0.5%. For the time being, the official rate is 21.25%."
-- From Gardianul ("The Guardian") this morning.
Now that is interesting, and here's why. At the moment, the rate of inflation of the Romanian leu is somewhere around 12%. The National Bank is dealing in leu, so it includes this figure in its interest rate. So the real interest rate is 21.25% minus inflation, or around 9%.
Now, this raises a point. Right now Romania is going through a period of disinflation -- falling inflation. Inflation was about 18% in 2002, 14% in 2003, and is expected to drop to 9% by the end of this year.
So -- in order to hold real interest rates constant, the National Bank will have to drop the nominal interest rate. And that appears to be what they're doing, right?
But. If inflation drops from 14% to 9%, this year then the nominal interest rate would have to drop by 5% to keep up. Since we're almost halfway through the year, we would expect the nominal interest rate to have dropped by 2% or 2.5% already.
But so far, that hasn't happened. In fact, this decrease is the first change since December. Although inflation has probably dropped from about 14% to about 12%, the nominal interest rate has stayed steady until this week.
That means the fall in the nominal interest rate isn't keeping up with the decrease in inflation. That, in turn, means that the real interest rate is actually rising -- even though the Bank is announcing a rate cut!
Last week, I speculated that the leu was rising because the Bank's tough talk on inflation was sending a signal that it would raise interest rates to defend the leu. Now, it looks like the Bank actually has been raising interest rates -- though quietly and through the back door.
I wonder if the rest of the government realizes this? -- Because raising interest rates tends to slow growth, so it's not usually something you want in an election year...
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